Monday is shaping up as a positive day. The dollar is up slightly and the Asian markets are higher and the U.S. futures are higher.
It was not this way when the futures opened Sunday night. The S&P futures were down over 5 points a couple hours after the open and I was already dreading Monday's open. An announcement from Chinese economists that China's GDP is expected to hit 9% when it is released on Thursday spurred the Asian markets and boosted the U.S. futures.
I was hoping to get a little retracement on Friday to give us an opportunity to get another position started but the -67 on the Dow was not convincing in either direction. I thought the +60 point bounce off the low was decent and it did cling to 10,000 at the close.
I am still worried about the rest of October but we have to play the cards we are dealt. With crude still rising on the falling dollar and hopes for a continued recovery in China that appears to be an area where we could add a couple of plays. However, after a +13% rally last week I would also like to see a dip there to enter a new position.
Apple reports earnings on Monday and they are likely to beat the street. They may also have the best chance to beat on revenue and that has been a tough task for most other companies.
Juniper and F5 Networks report this week and that may give Cisco a push higher. Unfortunately Cisco has been moving at a snail's pace so I don't see a play there.
Let's hope the current overnight bounce holds and we will play the FXI and China for the GDP bounce.
FXI $43.21 - iShares China
The iShares FTSE/Xinhua China 25 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE/Xinhua China 25 Index. Link to Components
The FXI lost a buck on Friday and should recover at Monday's open. This ETF is volatile but with the GDP due out Thursday we should get a pop in price the next couple days.
Sell to Open Nov $46 Put FXI-WT currently $3.40, Stop loss FXI @ $42.50
We do not sell out of the money puts for a few cents and then hope the market does not correct and cost us a fortune to exit. I don't like to risk a dollar to make a quarter.
The concept for Option Writer is to find solid momentum plays with enough volatility to inflate the option premiums. We will sell in the money naked puts ahead of the stock price and let the stock rally to our strike.
Selling in the money puts allows us to capture nearly dollar for dollar the movement in the stock price.
Because we are selling in the money that same dollar for dollar move can go against us as well. For this reason we establish tight stops to take us out of the play for a loss of a few cents rather than let the losers grow and "hope" they rally again. In a typical month we could get stopped out of twice as many plays as we close for a profit but those stops will be minimal and the winners worth the trouble.
If you do not have the ability to sell options you can turn the plays into spreads by buying a lower strike put. This will decrease your margin requirements but it will also decrease your profits.
There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.
Here is the most common margin calculation for naked puts.
100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))
For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)